Solar Threatens Old-Fashioned Utilities

The big question among some utility executives is, "when will solar power reach grid parity?" By grid parity, some mean, "when will solar power become competitive compared to other sources of electricity?" Others mean, "when will solar power no longer need government incentives?"

The train left the station about two years ago. While traditional utility analysts debate levelized cost comparisons between solar, nuclear, coal and natural gas, independent power producers installed approximately 110,000,000,000 watts worth of photovoltaic (PV) solar panels.

In fact, according to GTM Research, about two-thirds of all solar PV capacity in place worldwide has been installed since January 2011. Like Moore's Law, the number will double again within the next 2-1/2 years.

In the United States, the trend is similar. According to GreenTechSolar, "(m)ore than two-thirds of America's distributed PV (everything except for utility-scale projects) has been installed since January 2011. And by 2015, the country's distributed PV market is expected to jump by more than 200 percent."

While utility executives wring their hands over solar power economics, independent power producers quietly jumped in and started little businesses. Many early adopters are already earning strong cash flows.

Arguments about grid parity are a distraction. If grid means a deregulated regional transmission organization like PJM Interconnection or Electric Reliability Council of Texas, the solar power industry is way past utilities' dreams. In the wholesale markets, solar power's production costs are near zero, which is far cheaper than hydroelectric, nuclear, coal, natural gas or fuel oil.

The wholesale power markets are sending an important message. Cost leaders win. Solar is the grid's cost leader. As such, market forces cause solar power to displace the grid's costly and dirty generators.

Solar has become a threat to traditional utilities, particularly the regulated utilities. According to Business Insider, "America's solar revolution is twisting the utility industry into knots."

Long term, traditional local distribution utilities will be fine. Tariffs will be adjusted and shareholders will continue to earn a fair return. Nevertheless, many old-fashioned utilities are threatened.

Government subsidies irk utilities the most. They think the one-time investment tax credit (ITC) is unfair. But there is no check written from the U.S. Treasury. One hundred percent of the owner's solar assets are at risk. Solar power assets only earn a one-time reduction in federal income taxes.

Compare this with the nuclear power industry. Five nuclear power plants are currently under construction and two just failed. Southern (SO) is building two in Georgia. SCANA (SCG) is building two more in South Carolina. The Tennessee Valley Authority (TVA) is completing one in Tennessee. Duke Energy (DUK) nixed two units in Florida (at a cost of about $1 billion). Combined, the new nuclear units will cost more than $41 billion dollars.

Of course, TVA is a federal agency. Consequently, everything TVA builds, including their new nuclear plant, is 100% guaranteed by federal taxpayers.

Southern, SCANA and Duke are heavily dependent on government guarantees and supports. Before they started constructing their new units, all three locked down state guarantees. They expect a 100% government guarantee to cover any of their debt. They expect a 100% government guarantee to cover all their stockholders' equity.

Proof is Duke's experience. Like Solyndra, Duke's billion-dollar experiment failed. As Bloomberg reports, "Duke has collected $819.5 million in Florida since 2009 for the Levy County project. Under a settlement with the state, Duke plans to collect another $350 million in costs from Florida customers over 20 years starting in 2017."

Southern is not stopping with their state. It is seeking additional guarantees from the federal government. Southern applied for federal loan guarantees. Unlike Solyndra's paltry $535 million guarantee, Southern's federal guarantees could top $3 billion if it is awarded.

It goes beyond government guarantees. According to the World Nuclear Association, the Energy Policy Act of 2005 gave domestic nuclear power industry:

Production tax credits (PTC) of $22 per megawatt-hour from the first 6,000 MWe of new nuclear capacity (the same rate as available to wind power).

Federal risk insurance of $2 billion.

Rationalised tax on decommissioning funds.

Extension for 20 years of the Price Anderson Act for nuclear liability protection.

Surprisingly, new coal facilities bank similar state guarantees. Some federal supports are also available for coal power plants. Southern just harvested state guarantees for debt and equity, $270 million in federal grants and $133 million in federal tax credits for their new coal-fired power plant in Mississippi's Kemper County.

When discussing grid parity, none of these benefits is monetized. Yet, these same utilities want to strip solar power of their singular benefit: their investment tax credit.

The bigger question is not if solar power reaches grid parity. Rather, it is when will nuclear and coal no longer rely on government guarantees and handouts.